It’s common for experts and non-experts alike to occasionally drop a big steaming pile of bad financial advice on the laps of twenty-somethings. I’d like to believe that most twenty-somethings have the financial acumen to wade through all of the crap and make good decisions, but you only need to look to their negative personal savings rate, poor average credit scores, tiny net worths, non-existent retirement savings, and mounds of student loan and other debt – to prove that’s not the case.
There have been some high profile examples in recent years of supposed experts giving twenty-somethings bad advice. James Altucher’s awful 401K advice for twenty-somethings immediately comes to mind. Even advice that is intended to be helpful (i.e. the consensus 10% savings recommendation that comes from so-called “personal finance gurus”), can really hurt twenty-somethings.
Twenty-somethings can be extremely susceptible to being taken advantage of financially. Those in their twenties are often responsible for their own finances for the first time in their lives, and everyone wants a piece of their newfound earnings – credit card companies, retailers, realtors, student loan companies, auto financiers, telecom companies, clothing manufacturers, tech companies… the list goes on. In many ways, twenty-somethings are being pushed off the financial cliff by others, which is sad.
What is even sadder, however, is when a twenty-something encourages their peers to dive off the financial cliff with them! If there’s one thing twenty-somethings are particularly susceptible to, it’s peer influence. That’s why I was really taken back by the popularity of a recent article from a twenty-something lifestyle writer, titled “If You Have Savings in Your 20s, You’re Doing Something Wrong“. It has been making the internet rounds and apparently 64,000+ people found it worthy enough of a social media share. The writer, Lauren Martin, is self-described in her bio as a former writer of “fart jokes at Smosh Magazine” who now “writes riveting commentary on nude pics, condoms and first dates”.
There has appropriately already been a lot of dissent to the article, however, as the de facto personal finance blog for twenty-somethings (I’m not sure if that’s even true, but the name doesn’t hurt), I felt like I should chime in with my own take.
Ms. Martin lists a series of arguments for why you should be totally devoid of savings in your twenties:
“When you’re too worried about your bank statement, you’re not making your own”
“When you’re saving for yourself, you’re refusing to bet on yourself”
“When you have something to bank on, you have nothing to reach for”
“When you live your life by numbers, you strip yourself of poetry”
“When you die, you can’t take your money with you”
“When you deprive yourself, you don’t learn how to TREAT YO SELF”
“When you care about your 401k, your life is just “k””
If you cut through the clever soundbites, her statements are more appropriately summarized in two arguments:
- The purpose of making money is to spend it, and you need to spend it in order to be happy.
- Your career is better off if you don’t save and are desperate for money.
On the first argument, I agree that buying experiences can occasionally boost happiness levels. Buying stuff, on the other hand, has been shown to have little to zero impact on sustained happiness. And with the experiences component, can’t we have a teeny bit of moderation here? The true best things in life typically don’t cost money or can be done with very little money. If you feel like you constantly need to spend your money in order to feel like life is worth living, you’re doing something wrong. Spending money won’t fill an empty hole in your life.
On the second argument, I suppose desperation for money could offer you some sense of urgency, which might make you more career focused out of necessity. But isn’t this a self-defeating argument to begin with? Experiencing life and advancing your career are diametrically opposed forces, often times, with time being the major requirement for both. Giving to one takes from the other. And why add all the pressure and stress that comes with being financially desperate? I work much more effectively when I don’t have the threat of losing my house, worrying about scraping enough together to pay off the never-ending stream of bills, or how I’m going to put food on the plate for my family. A career can be stressful enough as it is, without those added pressures. And there is no reason why you can’t simultaneously save money AND advance your career.
I’d add that your career will be significantly more rewarding when you are operating from a position of financial strength instead of weakness. Financial strength, even if short of true financial independence, gives you the freedom of choice and the ability to take more risks. It gives you more flexibility to choose a career path that is more rewarding for you and the time flexibility to ramp up the “life” part of work-life balance. There is a lot more to life than career status and earning power, as someone who transitions from there twenties to their thirties will rudely discover.
Aside from these things, Lauren completely overlooks 2 MAJOR math equations…
Your Twenties are Statistically the Best Time in your Life to Save
Sadly, the average earnings growth from age 35 on is zero. I’ll repeat that for added emphasis: ZERO. Almost all of your earnings growth comes in your twenties. At the same time, your expenses can be significantly lower in your twenties if you don’t yet have big financial commitments like a mortgage, kids, and major medical. If you’re doing things right, there is a widening gap between your earnings and expenses. Therefore, the BEST years of your life to save are in your twenties. If your spending keeps up with your earning growth in your twenties, you’re just another victim of lifestyle inflation.
That earnings growth doesn’t advance from age 35 on is also testimony that people start valuing the life component more as they age. Your career can simply run out of steam and passion, or you simply start valuing other things like family and independence more. Unfortunately, you’ll likely be saddled with higher expenses (home, kids, medical) as time goes by. Is THIS the best time to start saving?
The Power of Compound Interest
The other major reason to begin saving more in your 20’s is so that you can take advantage of the power of compound investment returns over a longer time horizon. In my power of compound investment returns post, I found that:
“$1 saved in your twenties can be the equivalent of $10 saved in your fifties, if invested over time.
$10.06 to be exact – at an average annual rate of return of 8% on your investments over 30 years. Even if you factor in 2% annual inflation, you’d have 556% of the buying power for every dollar you save today.”
When your savings start working for you, they afford you to buy even more experiences later in life, with zero additional work required. And if you want, you can retire much earlier and be left with more time and money for those experiences. Besides, if you are offered a 401K match in your 20’s, you’d be foolish not to claim that free money.
How about a practical example to hammer home the value of compound returns?
“William, starts saving $4,000 a year when he is 20 and stops after 20 years, after having saved $80,000. His brother, James, starts saving $4,000 at 40, and does so for 25 years, for a total of $100,000 saved.
They earn 6% on their savings.
At age 65, William will have $850,136 in his account, while James will have only $219,242. Despite having saved less, William’s nest egg will be almost four times greater because of compounding.
And that’s at just a 6% return. An extra 2 percentage point increase would more than double William’s account.”
And in fact, starting at age 25 vs. 35 can 2X your retirement savings from compounding.
Life (hopefully) doesn’t end in your twenties. Your twenties are a fun time, but there is no reason why your 30’s, 40’s, 50’s, and beyond can’t be even better. With more savings from your twenties, they will, and a wiser/better version of yourself will know just how to use them. Don’t completely screw your future self in pursuit of filling a bottomless hole with money in your 20’s.
This mentality is the crux of the problem – “I’ll do it later.” And then, when and if later comes, it’s too late for most people to start investing enough for a comfortable retirement. I’d much rather be boring and “deprive myself of poetry” than work well into my seventies and happily recalling that awesome, incredibly expensive apartment and car I had in my twenties.
“Do it later” never results in “now”, does it?
I don’t think there is a such thing as universal financial advice. People want and derive satisfaction from different things. I disagree with the author in that everyone should have an emergency fund and a plan for adverse events. You don’t want to end up on the street.
After that… it depends. I enjoy driving a nice vehicle, and trying new restaurants, giving gifts, taking trips.
I grew up with a penny-pinching family that ate wherever the coupons told us to, baked indoors because A/C isn’t necessary. Stayed at inconvenient, sometimes dirty places on trips and sat in the car for 20 hours because flying is too much money.
Spending money can improve quality of life to a point. I don’t plan on retiring at 40. And yet I still save a lot… not stretched by any means. You can save smart -and- spend smart. Without driving yourself crazy over $10 fluctuations in your electric bill and how it could be $50 in your golden years.
This is a good moderate viewpoint. Mine is “save as much as you can”, which is on the other end of the spectrum and leaves a little wiggle room for interpretation and fun stuff. I still have my guilty pleasures and stuff/experiences I like to spend on, like most people.
Lauren’s opinion, however, is very extreme – no savings, whatsoever, including 401K. I think that’s wrong and dangerous.
I wish I knew more about the power of compounding interest when I was younger. I would’ve had a lot more by now.
My philosophy is to enjoy life while also saving for the future. Basically personal finance is personal and means different things for everyone. I choose to take trips with my family and enjoy some of what life has to offer. Yes I save for retirement and save for my dreams and some would say I am pretty frugal but not knowing how long I have on this earth is my reason not to work as much as I could so I can spend the time enjoying my family. Maybe I won’t be as rich as I could be but I we will have the great memories.
We all must make financial choices, learn from others but make your own way. In the end to each his own.
GE, I like your take on the viral article. I agree with the original article that investing in yourself is important,and you’ve mentioned before that going to school to get a better job with higher wages can be justified. For the original columnist to ignore that savings is a way to get there is bogus. It’s routinely a good idea to save money first so that you can take advantage of opportunities when they come along.
I earned A LOT in my twenties. And spent a lot. On all kinds of useless junk, nothing too serious, unfortunately. I’m 35 now, with a small child and trying to run a home based business. I was in debt, had no savings etc.
If I met my old self on the street I’d punch her in the face. If I bothered save at least 10% of my income back then I’d have been on a way easier path.
So, no, your 20’s are not a time to squander money and be reckless. There’s fun to be had, even if you act like a mature person, not like a 5 year old in a candy shop :D
The Problem is too much noise in the financial industry.
Where do people my age get the best financial knowledge (from someone other than our mom and dad) who may or may not have sound advice?
Too much to know, the problem is 2 things:
1. People my age don’t care
2. Too much noise in the industry